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Abstract:This paper explores the composition of international reserves under an exchange rate target. The model allows for numerically calculating the shadow price – interpreted as the central bank’s sacrifice of policy precision given one more unit of portfolio variance – of the target exchange rate. The simulations indicate a two-regime demand for gold. The multiple equilibria results indicate that increasing the demand for gold from 0 to 21 percent shares of international reserves leads to a lower but unstable policy sacrifice. The next minimum sacrifice occurs approximately at around 40 to 60 percent of gold in the reserve portfolio. These results, therefore, indicate a wide range of possibilities for a central bank targeting the exchange rate to vary its demand for gold. Moreover, the results suggest that the ability to target the exchange rate is unaffected by the higher volatility of monthly returns on gold.

Location: Central Bank of Armenia, Dilijan, Armenia

Duration: 11AM-1PM

Registration is required for non-CBA staff per security. Please register at the following link and indicate whether you like to carpool to Dilijan:https://docs.google.com/forms/d/e/1FAIpQLSfxLCdvPScCTB0V6hQCBdui5A62_x_OAqrNos7oDXUj--Q5HQ/viewform

About presenter: Aleksandr V. Gevorkyan is assistant professor at St. John’s University, NY. His recent book (co-editor with Otaviano Canuto) Financial Deepening and Post-Crisis Development in Emerging Markets was published by Palgrave MacMillan in 2016.This research is co-authored with Tarron Khemraj of New College of Florida and Central Bank of Barbados.Visit: http://www.aea.am/Workshops.htmlFollow on Facebook